Harvey Ira Houtkin, a man who helped launch the electronic trading revolution, died last month while on vacation near San Diego. The Brooklyn-born native was retired and living in Aventura, Fla. He was 59.
Houtkin was a leading figure in the day-trading craze in equities that fueled the Internet bubble of the 1990s. From his perch as head of All-Tech Investment Securities, Houtkin gave retail investors direct access to the Nasdaq market through the Small Order Execution System, or SOES.
Houtkin’s All-Tech was not alone, as dozens of other day-trading firms sprung up during that period. Short-lived firms like Broadway Trading and Momentum Securities thrived and flamed out. But others like Tradescape.com and Cybercorp left a lasting contribution with their smart-routing technology, which formed the basis for the trading tools used on institutional trading desks today.
Still, Houtkin may have been day trading’s most vocal and visible proponent, particularly when it came to SOES. Nasdaq’s SOES was the first automated execution system on Wall Street and was set up in response to the Crash of 1987, when investors charged that Nasdaq market makers did not pick up their phones to trade in a falling market. Before SOES, every share traded went through a market maker.
Houtkin died after tonsil surgery at Sharp Grossmont Hospital in LaMesa, Calif., according to Mark Shefts, his brother-in-law and long-time partner at wholesaler Domestic Securities. “This was a major shock to everyone,” Shefts said. “We’re still not sure what happened…we’re looking into it.”
An Aug. 1 San Diego Union-Tribune story alleges that a lapse in care at the facility caused Houtkin’s death. After the emergency operation, he died because an air tube was either dislodged or blocked while he waited for a room in the intensive care unit, according to a whistle-blower physician on the hospital staff who spoke to the newspaper. The hospital has denied the charges, but the Houtkin family has requested an autopsy, the paper reported.
It was the Nasdaq Stock Market that brought Houtkin fame. Trading on SOES became popular and created a new business for Houtkin, a former risk and convertible securities arbitrageur whose firm went out of business as a result of margin calls from the Crash of ’87.
After the firm’s demise, Houtkin was trading his own account and realized that he had the right to trade auto-ex on SOES and didn’t need a market maker for a fill, said Shefts, who was his business partner since 1979. From there, the business grew.
“He turned [SOES] into a cottage industry, and a very successful one,” said Arthur Pacheco, CEO of iNano Capital Markets, who then headed Nasdaq sales trading at Bear Stearns.
Houtkin’s role in changing Nasdaq went beyond SOES. He was a central figure in a series of stories in the Los Angeles Times that looked at the inner workings of Nasdaq and which helped to support the allegation that market makers were colluding on prices to keep spreads artificially wide–the avoidance of the “odd-eighth.”
The stories put the spotlight on Houtkin, as the series reported for the first time that both the Securities and Exchange Commission and U.S. Department of Justice had launched investigations into Nasdaq trading.
The investigations led in 1997 to the SEC’s Order Handling Rules, which forced market makers to expose their best quote in a security, so investors could have access to the best price. “He wanted a level playing field, and that’s what he fought for.” Shefts said. “He wanted full exposure, and that’s what we have today.”
Prior to the Order Handling Rules, Instinet was, in effect, an interdealer broker, or hidden market, allowing market makers to buy on Instinet and sell to clients on a riskless principle basis.
Market making was an extremely lucrative business model. And so was SOES. These upstart traders were so successful trading against the quotes of established Nasdaq market makers that the market makers began calling them, “SOES bandits.” And the name stuck.
In fact, Houtkin wrote two books that used the pejorative term in their titles, “The SOES Bandits Guide: Day Trading in the 21st Century” and “Secrets of the SOES Bandit: Harvey Houtkin Reveals His Battle-Tested Electronic Trading Techniques.”
The two self-published books also got All-Tech into regulatory hot water with the NASD, and resulted in fines, said Shefts, who disagrees with the interpretation that the books were marketing material.
During that period, day trading mushroomed. One published report in 1999 estimated that 5 million retail investors dabbled in day trading, while another report estimated that full-time day traders numbered about 5,000.
All-Tech eventually set up 30 offices throughout the United States and had 1,000 day traders, Shefts said. Houtkin provided classes that trained neophytes how to trade on the auto-ex system–for a fee, of course. All-Tech also collected on each trade, too, once they opened accounts.
The rise and fall of day trading can be chronicled in the firm’s take on trades. As the business became more competitive, Shefts said, All-Tech had to scale down its charge per trade: from a high of $62 a trade in the fat years, down to $12 per trade at the end.
After the Internet bubble burst, Shefts said, day trading became a more difficult way to earn a living. The Order Handling Rules were also a factor, he said.
The lows for All-Tech came when it made national headlines, and became the poster child for the downside of day trading. A former day trading client–a chemist turned investor–came into All-Tech’s Atlanta office and opened fire, killing five people. The shooter did the same across the street to another day trading shop, Momentum Securities, and killed four others.
Shefts said the shootings were devastating to both he and Houtkin. A day does not go by in which he is not reminded of the incident, he said. It affected Houtkin to the point that Shefts believes it was a major factor behind why Houtkin retired five years ago. “That’s something you never forget,” he added.
One other legacy of Houtkin’s is the Direct Edge ECN. Three years ago, Domestic Securities sold its Attain ECN to Knight Trading Group, which has since taken in other brokers as partners to broaden the system’s appeal.
Houtkin’s final contribution to investors was a recent book. “Wall Street’s Buried Treasure: The Low-Priced Value Investing Approach to Finding Great Stocks,” was published in August, less than a week after his death. Publisher John Wiley & Sons said it was unaware that Houtkin had died when it sent out the book to financial publications for review.
Shefts called the often combative Houtkin, who grew up in a housing project in Sheepshead Bay and who later earned an M.B.A. at Baruch College, a fighter for the little guy. He also wasn’t opposed to taking on the establishment and ruffling some feathers in the process. “Harvey always wanted to do what was right. He changed Wall Street in many ways,” Shefts said. “Not everyone loved him, but he will be missed.”
